Trends in oil and gas financing

USD billion

40

30

20

10

0

- 10

6%

5%

4%

3%

2%

1%

0%

USD billion

60

40

20

0

-20

Since mid-2016, the majors have enhanced their financial conditions due to a combination of higher oil

prices, improvements in operational efficiency, and cost reductions. In 2018, free cash flow reached almost

USD 90 billion, a level not seen since 2008.

The improvement in financial conditions has also allowed the majors to reduce the high leverage levels

reached during the downturn period while returning value to shareholders. After having increased their debt by more than USD 115 billion during 2014-16, in the last two years, companies have decreased their debt exposure by around half of this amount.

During the 2014-18 period the majors maintained high dividend levels, compared to other industries, distributing nearly USD 50 billion per year on average to shareholders. They also re-introduced share buybacks; in the 2018, these reached the highest level since 2014.

Nevertheless, on a total return basis, the oil majors underperformed the market benchmark during this period, with relatively high dividends partly offset by bouts of weaker share prices.

Independent US shale companies have typically relied on new debt, selling assets or issuing new equity for

financing their operations. But their call on external financing has been reduced since 2016, thanks to efficiency in their activities, cost reductions, and a more disciplined approach to balancing the investment and cash flow generated by their own activities.

While shale companies in aggregate overspent also in 2018, the ratio between capex and cash flow has constantly declined from almost 2 in 2015 to just over 1 in 2018. Furthermore, shale companies have paid back debt and began to return cash to their shareholders via

share repurchases.

US light tight oil production, investment and free cash flow

80

40

0

-40

-80

In mid-2018, we anticipated that the shale industry was on the verge of finally achieving a positive free cash flow

for the entire year. The US shale sector indeed showed significant improvements in the financial sustainability of its operation, with its cash flow rising by about 50% while investment increased by only 20%. Ultimately, the shale industry as a whole did not turn a profit in 2018. Two

main factors during the second half of 2018 led to this result:

•Shale companies accelerated spending throughout the year as a response to oil prices steadily increasing throughout the first nine months of 2018.

•Bottlenecks in the evacuation pipeline capacity from the Permian meant large price discounts from the West Texas Intermediate (WTI) price, lowering financial income for shale operators.

Assuming no significant decline in the current level of oil

price (WTI price of USD 60/barrel), we estimate the shale industry be on track to finally achieving profitability in 2019 for three main reasons:

•The pressure coming from investors makes independents very likely to stick to anticipated

guidance, indicating cash flow neutrality on average at WTI USD 50-55/barrel prices. Although WTI prices have increased by more than 30% in Q1 2019, companies reiterated their commitment to previous plans.

•Takeaway capacity in the Permian is less of a constraint as new pipelines are entering operation.

•The large accumulation of drilled but uncompleted wells (DUCs) can represent an additional source of oil growth with a limited injection of capital. Preliminary

data show that the number of DUCs completed in the Permian has been accelerating since February 2019.